Investment Analysis
Gloomy days ahead for Asia's housing markets
Asian property markets, though still relatively unaffected by the credit crunch, will soon be affected by inflation and higher interest rates because of rising food, fuel and other commodity prices.
Higher food, fuel and other commodity prices affect the housing market negatively in several ways.
At the micro level, households may postpone their decision to purchase a new house or spend on renovation if they anticipate higher prices. At the macro level, higher food and fuel prices push inflation up. Monetary authorities typically raise key interest rates to stem inflationary pressure.
Asian households are particularly vulnerable to recent rises in food prices. The price of rice, the staple in Asian diet, has risen by more than 90% during the last year to March 2008, according the UN Food and Agriculture Organisation (FAO).
The price of other food also has increased significantly. Wheat was up 160% in March 2008 on a year earlier; soy bean oil by 104%, corn by 37%, and sugar by 26%.
Food prices are a key component in the Consumer Price Index (CPI). Their proportional weight ranges from 28% in Singapore, to 33.2% in China, to almost 50% for urban workers in India. High food prices will persist until 2009, according to reports by the FAO, World Bank and the International Rice Research Institute.
ANNUAL HOUSE PRICE CHANGE (%) END-2007 |
|
| China (Shanghai) | 35.43% |
| Singapore | 31.18% |
| Hong Kong | 24.95% |
| Philippines | 15.15% |
| Japan (6 major cities) | 8.40% |
| South Korea | 3.08% |
| Source: Various Sources | |
The price of almost all commodities is increasing, not only food. The price of light sweet crude oil surged to US$115 a barrel in April 2008, up almost 80% from a year earlier. NYMEX crude oil has been above US$100 per barrel since March 2008.
Many Asian economies which have recently experienced residential real estate price surges such as China, Singapore, Philippines, Hong Kong and India (all of which registered double-digit house price increases in 2007) are under significant inflationary pressure (see table).
Higher inflation and interest rates
Monetary authorities typically raise interest rates to combat inflation. They can also increase the cash reserve ratio (CRR) of banks or sell bonds or other financial instruments to reduce money supply.
The Reserve Bank of India (RBI) raised the cash reserve ratio by 50 basis points in two stages to mop excess liquidity and contain inflationary pressures. The CRR will be 7.75% effective April 26 and 8% by May 10, 2008.
INFLATION (%) |
||
| COUNTRY | 2008 (LATEST) |
2007 (SAME PERIOD) |
| ASIA | ||
| China | 8.3% (Mar) | 3.3% |
| Hong Kong | 6.3% (Feb) | 0.8% |
| India* | 7.4% (Mar) | 5.9% |
| Indonesia | 8.2% (Mar) | 6.5% |
| Japan | 1.0% (Feb) | -0.2% |
| Pakistan | 14.1% (Mar) | 7.7% |
| Philippines | 6.4% (Mar) | 2.2% |
| Singapore | 6.5% (Feb) | 0.6% |
| South Korea | 3.9% (Mar) | 2.2% |
| Thailand | 5.3% (Mar) | 2.0% |
| Non-Asia | ||
| Euro area | 3.6% (Mar) | 1.9% |
| New Zealand | 3.4% (Q1) | 2.5% |
| South Africa | 9.8% (Feb) | 5.7% |
| UK | 2.5% (Mar) | 3.1% |
| US | 4.0% (Mar) | 2.8% |
| * Wholesale Price Index Source: National statistics |
||
The RBI, similar to other central banks in Asia, left key interest rates unchanged during the first half of April.
However, most analysts indicate the key rates might be hiked in May if inflation continues to be above the official targets.
Fears of interest rate hikes cropped up in several Asian countries, particularly in Indonesia and China.
High interest rates affect housing markets in two ways:
- By discouraging investment and consumption and causing the economy to slow, higher interest rates reduce people’s willingness to spend on housing
- Higher interest rates discourage borrowing for housing loans.
The situation is unfortunate because some Asian housing markets have not yet fully recovered from the effects of the 1997 Asian Financial Crisis.
Even with strong house price gains in 2007, property prices in Asia are still below their pre-Asian Crisis peak levels. Despite 31% nominal rise in the over-all residential property price index, Singapore’s prices are still about 10% to 20% below their pre-Asian crisis peak level in real terms.
In the Philippines, even with the 15% increase in condominium prices in 2007, it is still about 47% below its peak level in real terms.
The housing markets most likely to be affected by monetary tightening seem to be China, India, Singapore, Philippines and Thailand, which have experienced the largest increases in inflation.
Will Asia tango together?
“With global financial markets interconnected, the world’s economies tend to move together. The synchronicity was observed with the global housing boom - never before in recorded history did so many countries experience so much house price growth all at the same time,” notes Prince Christian Cruz, senior economist of the Global Property Guide.
“The housing market slowdown may also be synchronized,” he adds. “Inflationary pressures are likely to cause Asia’s central banks to raise interest rates, and slow their housing markets,” he says.
However convergence will not be universal. Where currencies are pegged to the US, housing markets are likely to diverge somewhat from the global adjustment.
Countries such as Hong Kong and the Gulf must follow US interest rates. Unless those countries re-peg their currencies, their central banks cannot raise interest rates. This may lead to higher inflation including in the housing market.
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Your Comments
posted by Murat AKSAKALLI | 2008-06-02
Managing partner, Turkey
What is your expectations on Turkey housing market? Is it still good time for investing in Turkey?
posted by our Editor: Matthew Pollock | 2008-06-02
Our view is that there will be a slowdown for a year or two, but then the underlying strong fundamentals will make prices rise again. However, watch the politics. If your view is, that the political issues are resolvable, then all else follows. If the politics flash danger-signals, then avoid. You are probably as good a judge of this as anyone else.
posted by John Lim | 2008-06-15
Business Consultant, Hong Kong
What is your expectations on Malaysia housing market given the current change in political landscape and its currency re-peg? Is this a good time for investing in Malaysia?How is the Malaysia property outlook going to be?
posted by Cheolghee Kim | 2008-06-26
ADB, Manila, Philippines
For low income earners, spending more money on food and necessities (due to inflation) would discourage them to invest in housing. However, many high income earners would prefer holding properties rather than keeping cash that loses value as much as the inflation rate. In that case, the assumption made in this article can be regarded somehow overgeneralized. We need to define who are the major investors in each market first to reach a conclusion on its future direction. What would you think?
posted by michael brett | 2008-06-27
property consultant, london
I am thinking of investing in Cambodia over the next 5 years and I am looking for capital growth , I would be interested in your view
posted by our Editor: Matthew Pollock | 2008-06-27
Well, we are positive n Cambodia but it has already experienced several years of boom. My hunch is that like many of its neighbours it will experience an inflationary episode, and all things being equal, you would do better to wait till that has worked its way out of the system. But that is just a hunch, given from a distance.
posted by Ray Lawrence | 2008-06-30
Teacher, London
Where on the internet can I view month on month global property changes(statistics) and could you suggest a few quality global property blogs?
posted by our Editor: Matthew Pollock | 2008-06-30
Month on month global property statistics are not available anywhere on the web. Our quarterly statistics are as good as it gets, on a global basis. If you want to information at a monthly level, see our list of Central Banks and statistical offices, which are listed off the Home Page under "Price Trends". As to your second question, there is a list of property blogs on our site under the international section of "Useful Links", which can be accessed within any country page of the "Selection Location" menu bar.
posted by Ashish Shivam | 2008-07-01
Analyst, Pune, India
The realty sector in India is witnessing the elemination of small developers due to increasing inflation(touching 12%)and interest rate by government, which has created severe liquidity crunch.
posted by RAJ BABU | 2008-07-02
business consultant, bahrain
Bahrain like Dubai is experiencing a major construction boom with so many project comming up. While the boom seem to be supported by the new law where the expats can own properties in certain areas , there certainly seem to be a time in future where there would be an huge over supply. In the last 5 years prices have nearly doubled and still seem to continue to rise as many new projects shall atleast take a few more years to complete. Would you advice investors to hold on or flip and get out of the market.
posted by David Ho | 2008-07-02
Broker, Canada
Given the lower price point and growth potential in 2nd and 3rd tier cities in China, do you think real estate developments there would be good bets?
posted by mike.mags | 2008-08-08
Consultant, Pune
The Pune property prices have not fallen as inflation has kept it up due to high commodity prices but the rentals have come down drastically and borrowing costs have risen and there is a liquidity crunch in the banking system.This is the dilemma.In such senario shud one sell or hold on to property in Pune.
posted by Damian Gill | 2008-08-12
Consultant, Australia
If we assume that 75% of all the bad news has come out, re; sub-prime, and that there now appears to be good value in pockets of the US housing market, especially Florida, where it is not uncommon to get over 11% yields, do you think it is worth dipping your toe into the water yet?
posted by our Editor: Matthew Pollock | 2008-08-12
Well certainly, if there really is evidence of 11% yields, this alone would make me enthusiastic. However as to the bad news being past, I would be more skeptical - not in terms of horrendous headline revelations, but because the housing market downturn will inevitably have a large effect on the economy, and past experience suggests that it takes a long time for housing markets to find the bottom, especially in real terms. However if you are considering a US investment it certainly would make sense to prepare by shifting some assets into US$. The markets have already responded to the likely future US increases in interest rates as the Fed's focus shifts from the housing market crisis to inflation, and in my view the US$ is likely to strengthen further as US interest rates move up, given also that (at present) it looks as if European interest rates will move down.
posted by Ali Faizan | 2008-08-24
Banker, Dubai
Given the recent overheating in the UAE property market in general and the Dubai market in particular. There are concerns of oversupply and potential correction by 2009, waht is your view on the above and how do you see the market performing up to 2010